Moneyization, Part One

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This article will hopefully be the first part of a series on the dominant
global money trend, so important to Gold investors. Around the world investors
have been repositioning their financial wealth in currencies that are expected
to serve well as a store of value. In most countries of the world, citizens
understand that money rarely retains its value. U.S. dollar based investors
and businesses are some of the last coming to this understanding. While this
writing may seem elementary to some, new investors are now clearly evident
in the Gold information network. To them these articles are primarily dedicated.

Full appreciation of the risk in currencies will not likely come to U.S. dollar
based investors and businesses, anywhere in the world, until such time as a
significant devaluation of the dollar occurs. Gold investors have understood
the situation for a considerable time, and many have moved to protect their
wealth by investing in Gold. Others are doing the exploration and study necessary
to understand the importance of Gold in a portfolio. One senses a growing body
of "Gold students" out there.

At the risk of angering more than a few, a distinction is drawn between Gold,
a real asset, and stocks, which are financial assets. Regardless of the outlook
for Gold, stocks are still paper assets. As paper assets, they represent a
residual claim on the income and equity of a company. As paper assets, their
valuation is still subject to all the vagaries of all paper assets. Stocks
are not an ownership interest in Gold. The stocks, may in the short-run, trade
like "options" on Gold, fast and wildly, but they should not be the primary
source of an investor's exposure to Gold.

Investors need to understand that the monetary dynamics in process around
the world are extremely positive for Gold's dollar price. The source of this
outlook is a global reshuffling of money that has been in process for decades.
Investors, therefore, should go to the heart of the matter, adding Gold to
one's portfolio. Why go to a secondary methodology? Why put someone or some
structure between the returns on Gold and the returns earned in your portfolio?
That said and with enough stock investors now upset, we can move on to understanding
the situation. Once one understands the global monetary shift in process, acceptance
of this view becomes more reasonable.

While many readers are seasoned Gold bugs, enough new individuals are building
an interest to justify some return periodically to the basic fundamentals. The
price of Gold is simply the inverse of the Gold price of a currency. While
that sounds like campaign rhetoric, the statement is true. Gold at $400 per
ounce is the equivalent of 0.0025 ounces of Gold per U.S. dollar. Alternatively,
one U.S. dollar is equal to 0.0025 ounces of Gold. The relevant price is
Gold ounces per dollar. The dollar price for Gold is simply a convenient
form of stating the matter. The relationship being discussed is portrayed in
the first graph, and taking some time to understand it is recommended.

Most have suffered through one class in school where supply and demand curves
were portrayed graphically. We learned that an increase in supply would cause
price to fall. A reduction in demand would also cause lower prices. The
important matter here is that the price being discussed in those graphs would
be the Gold price of a dollar, not the dollar price of Gold.

If the supply of dollars increases faster than the supply of Gold, the price
of dollars will go down. Note though that the price that will go down is Gold
ounces per dollar. Excessive dollar creation might push the price down to,
for example, 0.0022 ounces per dollar. In the conventional statement of price,
that would be equal to approximately $455. Either price can be found by taking
one(1) and dividing by the other price. Thus, the declining value of the dollar,
in ounces of Gold, is what pushes up the dollar price of Gold.

An alternative way of looking at the situation is from the side of the
demand for U.S. dollars. Many questions come in on the bubble phobia
of so many Gold investors and analysts. If a financial bubble bursts in the
U.S., foreign investors may develop a reluctance to accept and hold dollars.
In the words of an economist, demand for dollars would fall. If the demand
for dollars declines, the price of dollars will decline. The relevant price
is again Gold ounces per dollar, and that price would fall. A falling ounces
per dollar price implies a rising dollar price of Gold. Hopefully, this short
but meaty discussion will answer the questions which are in so many e-mails.

The second graph may be an aid in visualizing this concept. Along the horizontal
axis is the Gold price of the dollar. On the vertical axis is the "demand" for
dollars. Those actual numbers mean nothing as we simply needed positive and
negative values on the axis to do the graph. Positive numbers indicate positive
demand for dollars. Going up the vertical axis means that demand for dollars
is rising. The reverse is the situation for the negative values.

As demand for dollars rises, going up the vertical axis, the Gold price of
the dollar increases. If the demand for the dollar rises, the world would be
willing to pay more Gold for each dollar. Each dollar buys more Gold. As shown
in the previous graph, this means the dollar price of Gold falls. If the demand
for dollars falls, declining on the vertical axis, the Gold price of the dollar
falls. In this case, the dollar price of Gold rises. This relationship is what
makes all of the Greenspan Financial Bubbles so dangerous, and why so many
Gold investors and analysts are concerned with them.

If for any reason foreign investors become reluctant to hold dollars, the
demand for dollars will fall. Bubbles, economic policy ineptness, or just bad
luck could cause this shift. The bubbles do matter. Fannie Mae's accounting
methods do matter. Monies require confidence to bolster demand. At present
the economic and monetary policies of the U.S. are built on a willingness to
put that confidence at risk. Ignoring bubbles is not wise.

With all the focus on bubbles we may be forgetting the global shift away from
the dollar that is developing. Bubble phobia is what day trading is to a multi-year
move in the market. Makes for a lot of fun discussion, but the trend is where
the profits come from not the trading. That trend, which is the source of Gold
profits, for the dollar is negative and investors should heed it. Not since
World War One have global financial markets made a shift similar to that occurring
in the monetary arena.

However, major differences exist between now and the early 1900s. One,
global financial markets now exist for money, accessible by almost anyone anywhere.
Individuals around the world can now shift their wealth from one money to another
with the click of a mouse. Two, national monies were still rising in
popularity in the early part of the 20th century. Today that popularity
is fading. Three, investors around the world are consciously and actively
managing the money exposure of their wealth with far faster and friendlier
technologies. Cell phones and the internet are clearly an improvement over
carrier pigeons.(And no, I have no idea what technology stock to buy to get
a play on that.) Consumers and investors are no longer willing or required
to keep their wealth in any particular money, and are exercising that right.

National monies, like either U.S. dollars or Canadian dollars, are those individual
currencies produced by individual countries. National monies were created for
reasons other than wealth enhancement as we understand the concept today. National
monies were created for a variety of reasons. Included in the motivations were
the perceived need to foster and manage national economic growth and to have
national identities(Helleiner,1998;Helleiner,2003). Appropriate attention was
not necessarily given to what might be the standards to which they should be
managed over time. National monies were essentially assumed to be necessary
to be a complete sovereign nation.

The attitude toward the sanctity of national monies has been changing. On
the higher plain, Robert Mundell's(1961) exploration into optimum currency
areas was the effort that started serious reflection and first elevated the
matter to a higher level, both in the academic and practical worlds. His receipt
of a Nobel prize certainly added respect to his work. Helleiner(1998) brought
attention to the historical rational for national monies. Motivations for these
creations were as often political as economic. At the time of their individual
births, national monies were established for what seemed near rational national
reasons. The test of time was not to be so kind.

At the ground level, attention to the subject of national monies received
further impetus in the 1990s for principally two reasons First, the record
of national currencies was acknowledged as poor(Shuler,2003;White,2003). A
seemingly endless chain of currency crises had developed. Second, the European
Union was soon to abandon individual national monies in favor of the euro.
Never in financial history have so many national monies been eliminated in
one peaceful moment.

The record of national currencies has been far from an exemplary one. Table
I summarizes a sampling of those national currencies that have experienced
severe stress and caused significant economic dislocation within the respective
country and/or region. This list is not intended to include all exchange rate
problems, only the major ones. Not included in this list are those countries
that are minor in importance or have experienced repetitive problems through
inflation, devaluation and confiscation.

Table ISignificant Currency Devaluations & Crises

Country

Year

Argentina

2002

Turkey1, Dominican Republic

2001

Brazil

1999

Russia

1998

Asia-wide

1997

Spain2

1995

Mexico

1994

Europe(ERM)

1993

UK, Italy2

1992

Sweden2

1992

India3

1991

Mexico3

1982

Mexico3

1976

U.S.

1973

1 Dellas & Tavlas2 Eichengreen,et al,20033 Wolf,2004

National monies have, on balance, been financial disasters for those holding
them. No wonder skepticism over Federal Reserve policies is widespread. Individuals
around the world are no longer willing to hold a dubious money. When the dollar
comes again under this cloud of money disfavor, a significant destruction of
the dollar's value will develop. That is the reason why understanding that
the value of the dollar is the concern for this era, and so important for the
prosperity of investors and businesses..

A general recognition has developed that money simplification through elimination
of national monies should increase trade, prosperity, and interchange between
peoples of different countries(Rose & Engel,2002;Mundell,2003). A record
such as that in the above table is not one that might promote trade, financial
prosperity, global economic progress and general harmony. The European Union's
creation of the euro was in part accomplished because of the dismal record
of currencies. The EU is coming to be recognized as not a panacea to all the
economic changes needed but as one of many steps toward removing roadblocks
to economic growth in that area(Allegret & Sandretto,2002). That tendency
toward agreement on the advantages of money denationalization and/or union
is evident by the way individuals and countries are "voting" with their national
monies, but that is for the next article.

The length of this article has now approached that which calls for a close,
and a quick summary. The 1990's was an era of an ongoing series of currency
crises. For investors, the key to understanding Gold is the issue of currencies,
more importantly the likely problems for the value of the U.S. dollar.
In the next article this discussion will be extended to the developments with
the Euro and the meaning for the dollar and Gold. Comments and questions are
encouraged. Those of you early in your Gold travels and learning have been
the motivation for this writing, so write us. The Gold market recently has
produced some exciting gains, as shown in the last chart. A new leg on this
Gold Super Cycle may well be developing. Prices for Gold under $400 per ounce
or, as you now know, 0.0025 ounces of Gold per dollar, will likely not be available
in 2005.

REFERENCES:

Allegret, J.P. & Sandretto, R.(2002). The Euro as a
Stabilizing and Harmonizing Force in the International Monetary System. Eastern
Economic Journal,28,105-120. Retrieved March 25, 2004 from ABI/Inform Complete.

Ned W. Schmidt,CFA,CEBS is publisher of THE VALUE VIEW GOLD REPORT and
author of "$1,265 GOLD", published in 2003. A weekly message, TRADING
THOUGHTS, is also available to electronic subscribers. You can obtain
a copy of the last issue of THE VALUE VIEW GOLD REPORT at The
Value View Gold Report. Ned welcomes your comments and questions, and
tries to answer most all. His mission in life is to rescue investors from
the abyss of financial assets and the coming collapse of the U.S. dollar.
He can be contacted at ned@valueviewgoldreport.com